Setting prices for plumbing and HVAC services can be a complicated process, but it’s essential if you want to be a successful plumbing or HVAC business owner. Proper pricing is a balancing act. The act of proper pricing is simple in theory: make sure you charge enough to make a profit, but not too much to scare away customers. Although simple in theory, executing proper pricing is something that few contractors fully understand. In this PlumbAmatic™ guide, we’ll cover the basics of pricing your services, from understanding the different types of fees to employing the right pricing strategies.
Know Your Cost of Labor
When setting the rates for plumbing or HVAC services, you must first know your true total cost of labor. Labor should represent about half of your cost of goods sold (COGS), so it’s critical you have a real understanding of not just wages, but what your actual costs of labor are. To calculate your total cost of labor you’ll need to take into account all costs of employing plumbers and HVAC techs beyond their wages. These costs typically include health insurance costs, payroll expense, workers comp, state and federal payroll taxes, PTO, and other benefits that you offer your team. What most business owners find when they sit down to calculate this out is that wages only make up a small portion of the total cost of labor.
Know Your Cost of Material & Equipment
The other half of the costs of HVAC and plumbing services is the material and equipment costs. It’s no secret that keeping track of what you pay for each and every trinket you buy in your business can be a real challenge. This is where a good software or our LINK TO PRICE BUILDER can come into play. Software or our pricing template can be a single source for you to keep track of your current cost of the materials and equipment you are buying and reselling to your clients. When you first start out, we recommend starting with your major plumbing and HVAC equipment items and working your way down to the installation materials.
Know Your Mix of Business and Efficiency
Plumbing and HVAC contractors come in many shapes and sizes and all derive their revenues from different streams. When setting your rates this should be a factor. Say for example you are a new construction company. The billable hour efficiency of new construction plumbing work is much higher than residential plumbing services. Because of this simple metric, you may be able to generate the same gross profit dollars as a new construction company at a lower rate than a residential service contractor. As a rule, the longer the duration of the jobs, the lower the rate can be. Your mix of business will also help determine how you charge for your services: flat rate based on the job or hourly with a time and material method.
Know Your The Overhead Costs of Your Plumbing & HVAC Business
We have covered the cost of goods sold, but what about all the other costs that continue on regardless of if you actually sell any plumbing or HVAC services? The ongoing costs of being in business such as advertising, rent, insurance, admin labor, phone & internet and other costs that happen regardless of if you sell anything or not are known as “overhead”. Overhead is often overlooked and minimized by home service contractors, and if this is not factored into how you set your rates for services, it will impact the overall profitability of your company. When setting your rates, companies with large overhead expenses will need to charge more than businesses with little to no overhead. This is why the one-man-band plumbing contractor is almost always cheaper than the established contractor.
Know Your Local Competition’s Pricing
An important factor in setting your rates and pricing plumbing and HVAC services is knowing what your competition’s rates are. Should your competition determine what your rates are or the final prices for your services? No. Your prices should be based on your costs. But it’s important to get a sense of what standard rates are in your local area simply so you know what you are selling against and where the local market is.When determining your rates, it is important to also have clear guidelines in place to adjust your prices as needed. Consider setting trade minimums or standard charge rates, getting customer feedback or market surveys, or adjusting pricing based on the volume of work you’re running. You may also want to consider offering different price points for larger projects that require additional labor or higher quality materials and supplies.
Decide How You Will Charge for Plumbing and HVAC Services
There are a few different types of fee structures that you can use when pricing plumbing and HVAC services for your customers. A flat rate is a single fee for the entirety of the job, regardless of how much labor or materials are used. Flat rate pricing for plumbing and HVAC services is the preferred method to charge for plumbing and HVAC services. We have found there are still many companies that are charging T&M, which stands for time and material. With this method, a plumbing company or HVAC company charges an hourly rate for the time spent on the job and a specific price for each material or piece of equipment used on the job. This system works well for companies that don’t have a standard price book or pricing template and for those that primarily do new construction or longer duration work. If you are looking for a template that can help convert your time and material company to a flat rate pricing company you can request a free plumbing or HVAC price book template here.
Factor in Fees, Discounts and Special Offers
When setting rates and building a price book for your plumbing or HVAC services, you should build in transactional costs. Common transaction costs often overlooked are credit card fees, financing fees and other discounts offered. The average transactional cost for plumbing and HVAC services is around 5%. For some contractors (specifically HVAC contractors) financing buy downs can be up to 10% of the sale. These transactional costs should be counted as a total cost for the job when setting rates.
Set Clear Profit Margin Expectations and Adjust Prices as Needed
After you have factored in all of the costs associated with providing your services, you have to decide what type of profit margin you expect after completing the work. Each business has different goals and in turn different profit margins and requirements. A HVAC company in growth mode may choose to sell their work at a lower margin than a plumbing service business in comfort mode. At the end of the day, most business owners we work with are looking to make a fair profit but most importantly want to take care of their clients and team members’ needs. Setting your rates properly is the difference between creating that win-win for you and the client and going broke, which is why successful contractors track their profitability and adjust prices as needed.